Sybase negotiates truce with hedge fund

Company will buy back $383 million in stock

What's the price of independence for a billion-dollar enterprise software company these days?

For Sybase Inc., it was $383 million in stock buybacks to which the company agreed on February 26. The action got Wall Street hedge fund Sandell Asset Management off its back for at least two years, though with no guarantees after that.

The Sybase-Sandell agreement, which was apparently hammered out several weeks ago, will see Sybase buying back $300 million of stock via auction for between $28 and $30 per share before its annual meeting on April 15.

Sybase ended trading Friday at $26.40.

The company also committed to buying back another $83 million in stock by its annual meeting in 2009. In return, Sandell said it will support Sybase's board for the next two years and cease any other forms of anti-board activism.

Using a 6% stake it had acquired last fall in Sybase, Sandell had been pressuring Sybase to either offer itself up for sale to a larger software vendor, spin out one of its faster-growing divisions for an IPO, or buy back stock.

Sandell had originally proposed that Sybase borrow $1.1 billion in order to buy back $1.5 billion worth of shares over the next 3 years.

The move was praised by Wall Street, which expects the buyback to raise Sybase's earnings per share and its long languishing stock price.

This is "an important signal of management's confidence in business fundamentals, despite the broader macro headwinds," wrote Terry Tillman, an analyst with SunTrust Robinson Humphrey. He expects Sybase to pull in $1.09 billion this year and $1.15 billion in 2009.

Using up most of its cash reserve will also focus Sybase to focus on execution rather than potential acquisitions, according to a report by Lehman Brothers.

The agreement also appears to effectively squash any move by Sybase to put itself up for sale or spin out its mobile messaging unit, Sybase 365, or niche databases such as iAnywhere, out, for a public offering.

"Our view has always been that we see a strong synergy around our businesses, and there is a lot more value with them being together than being pulled apart," said Mark Wilson, a Sybase spokesman. That goes double, he said, with fears of an economic recession looming.

"In a down market, you want to be a bigger company, because IT groups don't like to place investments in startups" during those times," he said.

In the so-called Dutch Auction process, all interested shareholders tell Sybase how many shares they want to sell and at what price. Sybase tallies that up, starting with the lowest prices. When it reaches $300 million worth of shares, it sets that point as the price it will pay all shareholders it has already tallied.

It is unclear whether Sandell plans to sell its $140 million worth of shares via the auction for a quick profit, or hold on to them, betting that they will rise in value.

Sybase' shares hit a low of $21.80 last September. Sandell announced its Sybase stake and proposal in October.

Copyright © 2008 IDG Communications, Inc.

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